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A Comparison of Stock Market Mechanisms


  • Giovanni Cespa

    () (Universitat Pompeu Fabra and CREA)


I analyze a multi-asset market under two trading mechanisms. In the first (the unrestricted system), traders' demand for each asset depends on all equilibrium prices, and prices reflect the information contained in all order flows; in the second (the restricted system), traders' demand depends on the traded asset price, and prices reflect single order flow information. I show that informed traders' use of multidimensional private information depends on the number of prices they observe and on the price-formation process. I then give conditions rendering the restricted system more efficient than the unrestricted system.

Suggested Citation

  • Giovanni Cespa, 2004. "A Comparison of Stock Market Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 803-824, Winter.
  • Handle: RePEc:rje:randje:v:35:y:2004:4:p:803-824

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    References listed on IDEAS

    1. Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-185, March.
    2. Vives, Xavier, 1995. "Short-Term Investment and the Informational Efficiency of the Market," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 125-160.
    3. Nicholas Economides & Robert Schwartz,, "undated". "Electronic Call Market Trading," Financial Networks _001, Economics of Networks.
    4. Caballe, J. & Krishnan, M., 1989. "Insider Trading and asset Pricing in an Imperfectly Competitive Multi- Secrity Market," UFAE and IAE Working Papers 132.90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    6. Subrahmanyam, Avanidhar, 1991. "A Theory of Trading in Stock Index Futures," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 17-51.
    7. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    9. Wohl, Avi & Kandel, Shmuel, 1997. "Implications of an Index-Contingent Trading Mechanism," The Journal of Business, University of Chicago Press, vol. 70(4), pages 471-488, October.
    10. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-657, May.
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    Cited by:

    1. Giovanni Cespa, 2003. "Giffen Goods and Market Making," Working Papers 68, Barcelona Graduate School of Economics.
    2. Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002. "Inducing liquidity in thin financial markets through combined-value trading mechanisms," European Economic Review, Elsevier, vol. 46(9), pages 1671-1695, October.
    3. Schellhorn, Henry, 2011. "A trading mechanism contingent on several indices," European Journal of Operational Research, Elsevier, vol. 213(3), pages 551-558, September.
    4. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long-Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    5. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary University of London, School of Economics and Finance.
    6. Cespa, Giovanni & Foucault, Thierry, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CEPR Discussion Papers 8350, C.E.P.R. Discussion Papers.

    More about this item


    General Financial Markets: General (includes measurement and data) Stock Market;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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